Monetary Policy and Macroeconomic Uncertainties in Iran: an Empirical Approach with Time-Frequency Analysis

Document Type : Research Paper

Author

Assistant Professor, Faculty of Literature and Humanities, University of Guilan, Rasht

Abstract

Uncertainty in the key variables of macroeconomics with disruptions in the decision-making of economic agents and distortions in the resource allocation mechanism is considered an important challenge for Iran's economy.  Therefore, it is necessary to adopt appropriate policies to reduce uncertainty. So, the current research examines the effectiveness of monetary policy in reducing macroeconomic uncertainties during the period of 1989-2021. For this purpose, continuous wavelet transformation was used to discover the dynamics of the relationship between monetary policy and inflation uncertainty, economic growth uncertainty and foreign currency market uncertainty. The results show that the uncertainty of inflation only in the medium run and long run in the period of 1993-1997 has resulted in the aggressive reaction of the monetary policy. The monetary policy tool in Iran’s economy is not functioning effectively in reducing the uncertainty of the real sector. So that it cannot play a role in the medium and long run. The results show a strong relationship between uncertainty in the currency market and monetary policy instruments. So that in the long run, uncertainty in the foreign currency market leads to a greater growth of the monetary base.The mentioned process occurs due to the suppression of the exchange rate by the policy maker to anchor the Inflation expectations and gain credit. This procedure leads to the growth of monetary totals and the intensification of uncertainty in the foreign currency market, which results in the monetary policy becoming irrelevant. This article tries to provide useful information and policy suggestions by analyzing the relationship between variables in the time-frequency domain

Keywords

Main Subjects

References

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Quarterly Journal of Applied Theories of Economics
Volume 10, Issue 3 - Serial Number 38
December 2023
Pages 137-172

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